WEAKNESSES

RISK ASSESSMENT

An economy still very reliant on the agriculture sector

Despite a deteriorating security situation, economic activity looks set to continue to grow, but without hitting the heights of the previous decade (11.5% average annual growth between 2007-2012). The agriculture sector will probably continue to be the country's main growth driver (25% of GDP) and its largest employer (80% of the active population). Production levels should remain high but constrained by climatic conditions (drought) and by the lack of water supply infrastructure. Opium production (80% of world production) may be illegal, but looks likely to grow further (accounting for around 4% of GDP), after strong growth in 2016 (+43%). Farmers will probably turn increasingly to this crop because of its higher profitability, in particular in the north of the country where the deteriorating security situation may hinder the government's efforts to combat it. Investment will likely also suffer as a result of the security situation, which is putting a major brake on the inflow of foreign capital, especially in the mining sector, which nonetheless presents considerable economic opportunities.
Household consumption should be strong, in part because of revenues from opium production but also because of the massive influx of refugees. In 2016, some 600,000 Afghans were forced to leave Pakistan to return home. They face a worrying humanitarian situation, which is also aggravated by the 500,000 people displaced by the country's internal conflict.Inflation is predicted to rise sharply in 2017. The moderate rise in oil prices will probably make imports more expensive, and the massive influx of refugees might add to inflationary pressures. The comfortable level of foreign exchange reserves should ensure that the currency remains stable in the short term.

Large twin deficits, financed by international aid

Despite an apparently small public debt, Afghanistan's budget situation is anything but sustainable. 70% of the budget depends on international aid and the public deficit (excluding grants) is predicted to grow to around 10% of GDP. Nonetheless, the authorities, in partnership with international organisations, have drawn up an action plan aimed at several sections of the economy (water management, job creation outside the agriculture sector, etc.) in order to diversify and strengthen the economy. Better fiscal administration should gradually boost tax receipts (+20% in 2015) and in turn reduce reliance on international aid. In addition, mining (where progress has been hampered by insecurity and the lack of adequate infrastructure) could be a promising source of tax receipts. However, given the recent deterioration in the security situation, a huge fundraising effort was organised in Brussels in late 2016 and saw 75 countries and 25 international organisations pledge €13.6bn in grants over the period 2017-2020.The current account balance would be significantly in deficit (36% of GDP) without international support. In 2017, the balance of goods and service will probably remain in deficit (in value terms, imports outweigh exports by about four to one). The economy will probably still be heavily reliant on imports, mainly of capital goods, oil and foodstuffs, while the main exports are dried fruits and carpets.

The security situation is still a cause for concern

Apart from the economy, the security situation remains a priority for President Ashraf Ghani, who was elected in September 2014, but it deteriorated sharply in 2016. The Taliban continues to conduct offensives in two-thirds of the country and terrorist attacks in the big cities are on the rise. This situation delayed the withdrawal of foreign troops from Afghanistan (at least 10,000 soldiers are staying on until the end of 2017) in order to help the regular army combat the rise of the Taliban.
Moreover, the increase in international aid is contingent on President Ghani stepping up his fight against corruption. Governance remains a major challenge: the country languishes towards the bottom of international league tables, ranked 183rd out of 190 states according to the World Bank's latest Doing Business survey, and 166th out of 168 according to Transparency International's corruption index.Internationally, Afghanistan and Turkmenistan have increased bilateral cooperation in the last few years. Several infrastructure projects are being prepared, including a gas pipeline linking the two countries to Pakistan and India, and a large rail network.